LC in Courtroom - The Starsin Case

[Published in LC VIEWS, Vol. 3, No.5; May 2006]

Editor's note: LC VIEWS invited China's most talented LC specialist Jia Hao. who works for Bank of China, to write on the court case that influenced him most. His discovers "The Starsin" case most startling, most influential. How? Why? He tells us here. Jia Hao's story influences Kim Christensen, Nordea's Trade Finance Specialist in Denmark, to offer his comments on Jia Hao's insight into "The Starsin" case. He says The Starsin creates dilemmas for bankers - to or not examine the terms and conditions on the transport document. Soh Chee Seng, Technical Adviser to Association of Banks in Singapore, addresses the bankers' The Starsin concerns. He asserts, taking the support of existing UCP, that bankers need not examine the contents of the terms and conditions. As such The Starsin does not affect banking practice, though it may have affected the banker's mind as is evident from the story of Jia Hao, because it does not affect the existing UCP. The new UCP also may not impose the obligation of examining the contents of the terms and conditions as it appears from the writing of Soh Chee Seng, who is participating in the ICC task of UCP revision. Jia Hao rightly says that to maintain the efficiency of LC it is necessary to simplify document examination and to simplify document examination it is necessary not to ask, and expect from, the banker to do for which he has no knowledge and expertise, for example examination of the contents of the terms and conditions on a transport document. Banker should be and remain banker only and not additionally, for example, be transport expert as well.

The judgment in the courtroom triggers debate in the seminar room. The debate is judgment of the court judgment. The essence of the banking debate in the wake of "The Starsin" is whether the banker now should care to examine the terms and conditions on a transport document , whether on the front or on the back. The essence of the legal debate in the court is : who is liable to the cargo owner - shipowner or charterer? The essence of the academic debate among the trade law experts is whether or not the court is right in ignoring the international law and giving emphasis to the national law in international matters. A law professor in McGill University, William Tetley, says, commenting on the House of Lords decision in his writing in The Journal of Maritime Law and Commerce (Vol. 35, 2004), "The Starsin decision raises two matters that have been troubling me for years:

i) the failure of counsel and the courts, in this case and in many others, to consider foreign law, and

ii) the emerging trend of interpreting international law in a national manner".

But for the banks The Starsin, however, raises no matters or questions as it doest not affect UCP. What does not affect UCP does not affect the banking practice. It is good that there is only one set of rules for LC and it is UCP. It thus obviates the tendency of interpreting the international UCP in a national manner.

RAVI MEHTA

Bankers Revisit the Legal Case that Affected Them Most

TO ME, "THE STARSIN" MOST STARTLING

The Starsin case is a most attractive case with turns and twists judged in the commercial court ([2000]1 Lloyd's Rep. 85), the court of appeal ([2001]1 Lloyd's Rep. 437) and the House of Lords ([2003] 1 Lloyd's Rep. 571) deeply rooted in my mind although about two years have been elapsed. It is so interesting and uncommon that in a maritime case the UCP, the bible of letter of credit world by ICC Banking Commission had been frequently quoted and considered. And the Article 23 of UCP 500 was heavily relied upon to judge which party should be considered as the carrier which would be consequently claimed as the right defendant. In this article, I only comment with a banker’s eyes on the rather controversial issue of identifying the carrier besides which, notwithstanding, other three important matters had been also ruled in the courts.

Factual Summary

After a shipment of timber and plywood carried on board the vessel "Starsin" was damaged in transit from Malaysia to Antwerp and Avonmouth, the owners of the cargo who held transferable bills of lading brought an action against the shipowners for damage to the cargo.

Seventeen bills of lading were issued covering shipments on the vessel STARSIN from three different loading ports in Malaysia (Kuching, Port Klang and Balau) to Antwerp and Avonmouth. The trial judge divided the bills of lading into three groups according to different notify party on the bills of lading: "the Makros Hout bills"; "the Homburg Hout bills"; and "the Hunter bills". The bills of lading were all on the Continental Pacific Shipping form. The vessel was at all material times on time charter to Continental Pacific Shipping Ltd. The signature boxes on the face of the bills are completed in three different ways. The Makros Hout bills have the name of the signing company -- United Pansar Sdn Bhd -- and the two signatures prefaced by the words "As agents for Continental Pacific Shipping" ("The Carrier"). The Homburg Hout bills have the stamp of the signing company, PT Katana Line, and its signature followed by the words "As agents for the carrier Continental Pacific Shipping". The Hunter and Fetim bills have in the signature box the stamp of Multiport Sdn Bhd, then the signature, then "As Agents for Continental Pacific Shipping as Carrier". Continental Pacific Shipping is actually the charterer of the vessel “starsin”.

The reverse of the bill, however, identified the owner of the vessel as the carrier by demise clause and identity of carrier clause.

The demise clause is worded as “If the ocean vessel is not owned by or chartered by demise to the Company or Line by whom this Bill of Lading is issued (as may be the case notwithstanding anything that appears to the contrary) this Bill of Lading shall take effect only as a contract of carriage with the Owners or Demise Charterer as the case may be as Principal made through the Agency of the said Company or Line who act solely as Agents and shall be under no personal liability whatsoever in respect thereof.”

The identity of carrier clause is worded as “The Contract evidenced by this Bill of Lading is between the Merchant and the Owner of the vessel named herein……”

Were these shipowner`s bills of lading or charterer’s bills? That is, should the charterer or shipowner be considered as the carrier?

Court Judgments

The commercial court ruled: the charterer should be considered as the carrier, and the cargo owners should seek claim against the charterer.

The court of appeal with a majority ruling reversed: the contract of carriage was with the shipowners and that they were liable in contract as claimed.

The House of Lords re-reversed: the charterer was liable as carrier and could be liable for negligence to the owners of the cargo.

Comments

1. Demise Clause.

There seems to be no problem in the courts of U.K. in recognizing the validity of the demise clause as fully valid contractual terms. The Berkshire (1974 1 Lloyd’s Rep. 185), The Antares (1987 1 Lloyd’s Rep. 424), The Vikfrost (1980 1 Lloyd’s Rep. 560), The Jalamohan (1988 1 Lloyd’s Rep. 443) and The Ines (1995 2 Lloyd’s Rep. 144) are examples. But U.K.’s such position has not been generally accepted by the courts of USA, continental and civilian European countries, which have rightly viewed such demise clause with suspicion as illegal attempts by charterers to avoid their liability and evade the mandatory application of the international conventions (the Hague/Visby Rules). However, fortunately, the UCP 500’s clear and compulsory stipulation that the carrier must be explicitly identified by name on the face of the bills of lading compromises such incongruity and invalidate the demise clause to some extent. We may see such positive role of clearly identifying the carrier on the face of bills of lading in the judgments of Rix J in The Hector [1998] 2 Lloyd's Rep 287 as well as of Colman J and Rix LJ in the present case. Those judges held that it was good commercial sense to give greater strength to the clear statement on the face than to the barely legible printed clauses on the back. And conversely thinking, what if there is no clear identification of the carrier on the face of the bills but still bearing a demise clause on the reverse of the bills? I am afraid it will be still hard to shake off the ghost shadow of the demise clause in the courts of the U.K.

2. The terms and conditions of carriage and the “reverse” of bills of lading .

As we all know that bankers will not examine the contents of the terms and conditions of carriage which always appear in fine print form on the reverse of bills of lading, so even if the demise clause causes conflict to the identification statement on the front of the bills of lading, it does not constitute discrepancy. Thus, it seems to be naturally concluded that bankers should check the front and not check the back which is the place of the terms and conditions of carriage. We may refer to ICC R279 in which ICC concluded “Within the context of bills of lading, "appears on its' face" is the term given to the page which does not include the terms and conditions of carriage, i.e. it is the one which includes the information to satisfy the terms of the credit and the relevant articles of UCP 500.” But what if the terms and condition moves to the front, e.g., demise clause actually names the ship owner and appears on the front of the bills of lading? How can bankers judge whether it is the carriage term/condition or an ordinary clause, as substitution clause which seems to be checked as per ICC R283, R349? We may also refer to ICC Document 470/520rev. in which ICC analyzed and confessed that “The sub-Article(note: article 23(a)(v)) makes no distinction as to whether the terms and conditions (or reference thereto) are to appear on the front or reverse side of the document. …The issue may become more clouded should the terms and conditions appear on the face of the bill of lading. …it may be difficult to distinguish letter of credit criteria from terms and conditions, unless this is clearly indicated within the layout of the text….” This will also invoke my memory of the Maersk’s bills of lading bearing fine print offensive clauses which actually destroy the essential function of bills of lading as document of title. Can we treat such clauses as terms and conditions of carriage and disregard them? ICC seemed to have thought so; nonetheless, it then withdrew the relative statements and felt awkward and hesitant to settle the problem completely. Furthermore, if such clauses are clear, common and easy to be identified by bankers, may bankers still reasonably stay under the “hat of excuse” of the non-examination of terms and conditions of carriage? Therefore, we have to ask, as Lakshman Wickremeratne observed in his article “Can one ignore terms and conditions on the bill of lading?” (DCInsight Vol. 9 No.2 April-June 2003) that “Can it be said that banks will not examine the contents of such terms and conditions, wherever they are to be found.” In my view, it is hard and somewhat bold to say yes, when we examine the substitute clause, Maersk’s clause and the like on the face of bills of lading in practice. Let us start with digging the underlying intention of why bankers need not examine terms and conditions of carriage. As bank document examiners can not possibly have sufficient expertise of maritime law and practice like specialized lawyers and judges to be competent enough to scrutinize the complicated terms and conditions of carriage. So to keep the chief advantages of the letter of credit, namely, its certainty, efficiency, celerity and low cost, simplifying documentary examination by discharging examiners’ obligation of checking terms and conditions of carriage is advisable and welcomed in the letter of credit community. Thus, if we assume some clauses appearing on the front of bills of lading are easily found to be offensive or discrepant and bankers may check them up at first sight without affecting letter of credit mechanism’s efficiency and celerity, it seems to me reasonable to examine them accordingly. As a matter of fact, in nearly all sorts of bills of ladings in practice , the terms, conditions or clauses on the front are far less and simpler than those on the reverse are. As such, what about allowing the bankers to check only the front of bills of lading regardless of whether it contains terms and conditions of carriage or not? Nevertheless, it is only a immature suggestion.

3 Two carriers

Professor William Tetley proposed an alternative that the shipowner and the charterer should be held jointly and severally responsible for the carriage, the former as a contracting carrier and the latter as an actual carrier, just like a joint venture. So in his view, even naming the charterer only as the carrier, the bills did not reflect the true identity of the carrier, as article 23(a)(i) undoubtedly requires. However, in letter of credit practice, bankers are dealing with only documents on their face to see the apparent compliance with the credit and UCP. And UCP500 Article 15 clearly discharges banks liability for the general and/or particular conditions stipulated in the document(s) or superimposed. Therefore, bankers will never care whether the named and identified carrier is the real carrier under international convention or local maritime law.

4. Named and Identified carrier

UCP500 Article 23(a)(i) stipulates a bill of lading covering a port-to-port shipment must appear on its face to indicate thename of the carrier, and later in the Position Paper No.4, ICC further explains that “the name of the carrier must appear as such on the front of the document. The expression 'the front of the document' means the side showing the details of the goods, vessel and voyage, and the expression 'the back of the document' means the side showing the details of the contract of carriage.” But in ICC R563, the query argued that regards with the sentence “the name of the carrier must appear as such on the front of the document”, there was no express requirement for the use of the word “carrier”. And if requiring only “identified the carrier”, it will be done without mention of the name of the carrier, such as the demise and identity of carrier clauses which only identify the carrier as ship owner but not name the ship owner. Since this query, ICC realized that a watertight wording “name the carrier and be identified as such” be used. As a result, the UCP Revision is accordingly worded as “indicate the name of the carrier, identified as carrier”. It seems simple but subtle somehow. However, considering once again, the requirement for indicating the name of the carrier has actually implied a requirement for identifying the capacity of the company name. Because if only the carrier’s name is indicated but not identified as carrier, even though the company is indeed the carrier, bankers who examine documents on their face can not judge the name indicated is the carrier’s. The compliance with the requirement for indication of carrier’s name is not established. We may see another example. The credit requires an inspection certificate singed by an inspector approved by applicant. The inspection certificate presented is singed by company A and identified as inspector, but not identified as approved by applicant. So even if company A is the inspector approved by applicant in fact, it is still not acceptable, as bankers can not establish compliance on the face of the document that the company is approved one. ICC R403 also referred to and supported this position.

16. Can one ignore terms and conditions on the bill of lading? by Lakshman Wickremeratne (DCInsight Vol. 9 No.2 April-June 2003)

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Commentary on Jia Hao's Views

TO ME, THE STARSIN A CASE OF DILEMMAS FOR BANKERS

By Kim Christensen

It is always a privilege to read the words that flow from the hands of Jia Hao.

As I see it, Jia Hao discusses 3 general issues:

The LC independence principle

Terms & conditions in documents (e.g. transport documents)

The “carrier requirement” in relation to the UCP 500.

Although they work in a “mix” in this case, I will try to comment on them separately.

1: The LC independence principle

The weakness and the strength of the LC no doubt is the “independence principle” – which is, e.g., reflected in UCP 500 article 3 (contracts), article 4 (goods) and article 9 (obligation of issuing/confirming banks). This means that based on the documents alone, it should be determined whether or not a bank is obligated to pay. This is in my view linked to one of the major principle discussions during the last couple of years: How much transport knowledge must the LC banker have? Some have argued “none”. This is probably not true – since a number of statements from the ICC Banking Commission point out in the opposite direction. e.g.:

ISBP paragraph 98 requires that a banker must know which terms on a bill of lading (e.g. Free Out), has the effect that costs in addition to the freight have been or will be incurred.

ICC Opinion TA.567rev (unpublished) requires that a banker is able to determine that a tanker B/L is in fact a charter party B/L.

ISBP paragraph 64 deals in specific with trade terms, and besides the general rule that the trade term must be reflected in the invoice (if part of the goods description of the credit), it also states that: “Charges and costs must be included within the value shown against the stated trade term in the credit and invoice. Any charges and costs shown beyond this value are not allowed”

Some even go to say that the LC banker must be transport expert. Again this is probably not realistic – especially since levels of expertise may vary – and what may be necessary transport knowledge to one LC banker may seem far out to another.

The above is a clear dilemma – and a clear indication that the wording in ICC rules is so important. ICC rules on, e.g. transport document, must be solid based on industry practice – but be worded in a way that the LC banker need not be a transport expert when examining the transport documents.

The case presented here is a clear indication of exactly that: The job of the LC banker is to determine whether (in this case) article 23 has been complied with; i.e. who is signing and who is carrier.

The flow of this case clearly indicated the potential problem that may occur if the banker should relate to terms and conditions in the document: The verdict of this case was changed twice – first by the Court of Appeal and secondly by the House of Lords – and it may very well have been a different outcome had the case been tried in another country!

2: Terms & conditions on documents (e.g. transport documents)

Another dilemma is the phrase “appear on its face” – how far reaching is that? What does that include? The famous Maersk case – as also cited - here is a splendid example of how challenging the life of the document checker is: These terms and conditions were printed on the “front” of the document – but in my view still “Terms and conditions” – that may just as well have been on the back. What if they were on the back – and the nominated bank did not notice them – but the issuing bank did?

There are lots of dilemmas here – and I think it is impossible to establish a 100% watertight rule. The rules must be determined by practice - that is:

On transport documents the LC document checker should:

not read the small print on the back.

find the place on the document where it says whether it is a “shipped on board document” or a “received for shipment” document (usually in the small print in the bottom right corner)

check if the documents says anything to the effect that goods may be released without the original; e.g. “If required by the carrier ….”

3: The “carrier requirement” in relation to the UCP 500

With reference to the above, this case is actually (in my view) frightening simple from an LC bankers perspective: Is UCP 500 article 23(a)(i) complied with or is in not? From this case – as presented here – it seems to me without a doubt that it is. One example is:

Here you can see who is signing – in what capacity – who is carrier – and the “link” between the agent and the carrier. This is as they say: by the book!

Mr. Jia Hao also makes reference to ICC opinion R.403. To me this is somewhat different, since the document in question here is an inspection certificate. This means that it is examined according to article 21:

When documents other than transport documents, insurance documents and commercial invoices are called for, the Credit should stipulate by whom such documents are to be issued and their wording or data content. If the Credit does not so stipulate, banks will accept such documents as presented, provided that their data content is not inconsistent with any other stipulated document presented.

This means that the problem here is actually not a UCP sub-article – the problem is the wording of the credit: Since it is formulated as a document requirement, then naturally this must be reflected in the document. It is not – hence it is discrepant.

Conclusion

The research document by Jia hao sets focus on a number of interesting LC dilemmas. It is of course important to keep on focusing on those in order to make current practice as clear, easy and transparent as possible at all times. It is however vital to stress that all of those are borne by the very nature of the credit; e.g.

That it is independent from contracts and goods

That bankers focus alone of the documents while the buyers and sellers have their natural focus on the contract and the goods.

So if you totally remove those – you actually “remove” the LC – or perhaps more precise – you make another instrument with totally different characteristics. With different pros and cons.

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WILL NEW UCP ADDRESS THE BANKER'S THE STARSIN CONCERNS?

By Soh Chee Seng

Article 23(a)(v) of UCP 500 indicates that banks will accept a documents, however named, which appears to contain all of the terms and conditions of carriage, or some of such terms and condi­tions by reference to a source or document other than the bill of lading (short form/­blank back bill of lading); banks will not examine the contents of such terms and conditions.

In the new UCP, the proposed article on bill of lading covering port to port shipment is quite similar. A bill of lading, however named, covering a port-to-port shipment, must appear to contain terms and conditions of carriage or make reference to another source that contains the terms and conditions of carriage (short form/blank back bill of lading). Contents of terms and conditions of carriage will not be examined.

Whether it is UCP 500 or the proposed new UCP, it does not indicate that banks will not examine these terms and conditions if they appear on the reverse side of the document. It simply says that banks will not examine the contents of such terms and conditions. In my opinion, whether such terms and conditions appear on the front or the back of the document, banks will not examine their contents.